Week ahead: The Fed, ECB and earnings dominate, as Deepseek upsets US equity market

• Central banks take centre stage this week.

• Trump and Colombia clash over tariffs.

• Deepseek causes havoc with US stocks.

• Doubts creeping in about high valuations of US tech stocks.

• US equity futures sharply lower at the start of the week.

Donald Trump’s first week in the White House for his second term as President could be summarized in three numbers: 2.95%, the gain for the Dow Jones Industrial average, 1.7%, the decline in the dollar index, and -5.11%, the decline in the price of WTI crude oil. These numbers tell us a lot about Trump 2.0: the new President wants to turbo charge the US economy and boost the stock market, his bark was worse than his bite when it came to tariffs, which sent the dollar tumbling, and his obsession with getting the US to pump more oil, and trying to get Opec to do the same, is weighing on global energy prices.

However, this is the start of a new week, and new challenges face financial markets, and stock index futures have opened lower. Earnings reports and central bank meetings are centre stage. Added to this, Trump may have gone easy on tariffs so far; however, he threatened to slap a 25% tariff on goods imported from Colombia on Sunday after it declined entry to deported US migrants. This was ultimately resolved, with Trump getting his way and Colombia caving in, but it highlights how focused Trump is on using tariffs as a geopolitical threat in his second term as president. For now, Trump is tying tariff threats to US social issues like immigration. However, if he acts on his threat to impose tariffs on Europe due to its trade surplus with the US, then this would have a more chilling impact on financial markets.

Deepseek’s threat to AI roils US stock markets

The sustainability of the US equity market rally will face a major test on Monday, as US stock market futures slide sharply. The US dominates global stock markets due to the mega cap tech rally in recent year. However, the assumption that US tech will lead the future in the AI revolution will be tested this week.

The reason is Chinese AI company Deepseek, which released its new R1 product, a large language model, last week. It also released details on how it created its model, and this is causing an existential crisis in the US stock market. Nvidia’s shares tumbled on Friday and are expected to open lower today. Likewise, S&P 500 futures are pointing to a sharply lower open with a 1% decline currently expected. The Nasdaq is expected to face the brunt of the selling, with futures expecting a 2% decline. Deepseek is a clear reminder that US AI dominance cannot be taken for granted, as China plays catch up and Chinese tech stocks have surged on Monday.

Deepseek is causing excitement in financial markets for a few reasons. Firstly, it is an open-source model, compared to OpenAI, which is a closed source model, which means anyone can help develop it, and helps to keep costs low. Deepseek’s R1 model is also free to use with a limit of 50 messages a day, suggesting that it could be a real competitor to OpenAI and other US-based AI products.

Deepseek also shows that China can produce AI tech that is cheap to use for the consumer, which is leading to questions about the high level of capex that US tech firms are spending on their AI capabilities. For example, Meta has pledged to spend $60-$65bn on boosting its AI capabilities this year, but does it need to spend this money if Deepseek can produce a large language model for a fraction of this price? Meta could see its shares get targeted on the back of this development, ahead of its earnings report later this week.  

The other interesting development is that Deepseek seem to be able to build advanced AI tech even though there are sanctions in place that are blocking the sale of high-tech US chip exports to China. This calls into question whether Nvidia’s latest high tech and expensive chips are really necessary. Nvidia, saw its share price decline sharply on Friday, and it dragged the whole US semiconductor index down with it. Further declines are expected on Monday. Deepseek may have resource challenges, such as the ban on exports of high-tech chip technology from the US, but the nature of Deepseek means that it can pool collective expertise and knowledge, which boosts innovation and has allowed it to develop a cutting-edge technology that can compete with its US counterparts.

This is the first main threat to US-based AI. Having a non-American rival could trigger fears that AI could go the way of the EV market: China moves from importer to exporter and floods the market with its product. However, it is worth noting that Deepseek is still reliant on Nvidia chips, albeit those that are less advanced than the Blackwell chip.

We will be watching how US AI stocks perform at the start of this week. They are a major player in the US stock market and have fueled US stock market dominance in recent years. If AI is threatened by competition from China this could weigh on US stock indices more broadly. If tech does falter, and Deepseek leads to deeper questions about US AI dominance, then it could allow the broader stock market to rally, and for European equity markets to play catch up to the US. However, we think that the Deepseek threat could also spark a trade war, with Donald Trump threatening tariffs on China, now that he has so many friends in Silicon Valley, which could be negative for global risk appetite. How markets react to Deepseek’s new R1 model could send a chill through financial markets and may usurp the Fed as the most important driver of markets this week.

This week also sees a Fed meeting and an ECB meeting, along with a raft of earnings reports. Below we take a look at how these events could impact markets.

The Fed meeting

This is the main event for this week. Although there is a practically no chance of a rate cut from the Fed this week, there is a 99.5% chance that the Fed will keep rates at 4.25 – 4.50%, all eyes will be on how Fed chair Jerome Powell will react to Donald Trump’s call for the Fed to cut interest rates. With the Fed expected to remain on hold, they could find themselves in the middle of a political storm. The main event for financial markets is not just what the Fed does, it is also how Donald Trump reacts to it.

The core PCE report for December is also released on Friday, and this is expected to show a moderate increase in the gain in monthly prices of 0.2%, and the annual rate is expected to remain steady at 2.8%. Thus, the Fed could justify its cautious stance by citing resilience in the jobs market, and economic policy uncertainty caused by the new administration. In December, the Fed said that future rate cuts would be slower than markets were anticipating. If they stick to this message on Wednesday, then they risk igniting the ire of an emboldened Donald Trump. Do Jerome Powell and co. care? Powell’s term does not end until 2026, so maybe not. However, if Trump does hit back at the Fed, it may trigger some risk aversion in price action, the dollar could attract some safe haven flows and there may be a selloff in stocks with cyclical stocks more exposed to a spat between the Fed and Donald Trump, in our view. Thus, there is heightened volatility linked to this week’s Fed meeting due to Donald Trump’s reaction to it.

The ECB: A cut expected

There is a 96% chance of a rate cut from the ECB this week.  The markets are convinced that the ECB will cut, after the bank said in December that the risks to growth in the Eurozone are to the downside, and we do not think that the small pick up in the January PMI data will derail prospects for a rate cut. As ever, the longer-term market reaction will depend on what the ECB says about future policy. The ECB rate decision will take place on Thursday at 1.15pm GMT, followed by Christine Lagarde’s press conference at 1.45pm GMT.

Lagard’s press conference will be important to tell us about the pace of future rate cuts from the ECB. Currently there are a further 2.5 rate cuts priced in for 2025 after Thursday’s cut. Lagarde may not give a clear signal about the pace of rate cuts for two reasons: 1, there are green shoots of economic recovery and inflation concerns are elevated due to the strength of wage growth. 2, The pace of cuts at the Fed are uncertain now that Trump has weighed in on US monetary policy. The ECB will need to keep pace with US rate cuts to preserve European competitiveness and to limit any disorderly moves in the euro. Thus, there is an extra dimension to this week’s central bank meetings that could increase the potential for market volatility.

Earnings data

More than half of the Magnificent 7 will report earnings this week, including Microsoft, Meta and Tesla on Wednesday and Apple on Thursday. There is a lot resting on these reports, as tech stocks get sold off in the wake of China’s Deepseek threat. In the last 2 years, the Magnificent 7 have done the heavy lifting for the S&P 500, and together their share prices have risen by 131% in that period. However, shares have stumbled slightly in 2025, and they are no longer the top performing sector. So far in 2025, the equal weighted S&P 500 has outperformed the market cap weighted index, which is a sign that the stock market rally is broadening out beyond tech.

However, these earnings results matter. The market is expecting a sharp slowdown in earnings growth, even if this sector is set to outperform other sectors in the US equity market. Apple could be particularly at risk, especially as reports suggest that demand for iPhones in China has slowed sharply. Analysts have revised down their expectations for Apple’s earnings growth for the last quarter, and now expect revenues of $124.22bn and profits of $35.5bn. Analysts expect China sales to rise by 4% for the prior period, which could be tough to achieve based on recent estimates of Apple sales in China. However, while China is likely to be a weak spot in this earnings report, service growth could neutralize any bad surprise from China.

The risks are to the downside for Apple’s earnings. Even though analysts have scaled back their expectations in recent weeks, estimates for last quarter’s earnings are significantly higher than recent quarters. Thus, if China does under perform for Apple, there is a lot of slack for its other business units to pick up.

Apple has been the weakest performer out of the Magnificent 7 so far this year, and its share price is down 12%. Thus, if earnings are roughly in line, this could spark a recovery rally. However, any negative surprise could spark a deeper sell off, although downside could be limited due to the sharp decline in its share price already in 2025.

In contrast, Meta has been the top performer in the Magnificent 7 so far in 2025, and it has announced another boost to its capex plans for this year. It said that capex would increase by 60% this year to between $60bn - $65bn, as the company builds more data centres for AI capability. In sharp contrast to Apple, its share price is up nearly 10% YTD. We think that an earnings miss from Meta could be detrimental to its share price, since it is priced for perfection. Analysts are expecting revenues to come in at $46.93bn for the previous quarter, with net income at $21.29bn. At some point investors may want to see a return for all its capex spend on AI. Unlike Google or Microsoft, who are already using AI in their products, it is less clear how Meta is monetizing AI at this stage. At some point investors’ patience may run out.